302 Ch 19?
using unrealistic estimates to create reserves to smooth earnings
"Cookie jar" accounting involves ___.
accounting principle, accounting estimate
A change in ______ relates to a change in method of accounting for an item, whereas a change in ______ arises from a new calculation due to new information or new experience.
IFRS
Adam needs to correct an error that affected prior year income. Adam correctly judges that retrospective reporting is impracticable for this error. Under which accounting standards may Adam report the effect of the error in the current period?
depreciation methods
An example of a change in accounting estimate that is effected by a change in accounting principle is a change in ___.
increasing, creates
Companies can create smooth earnings patterns by ______ estimated expenses in a year with higher than expected earnings, which ______ income in later years.
net income, earnings per share, cost of goods sold
Crane Corp. changes its inventory method from FIFO to the weighted-average method. Which items will be affected on the income statement?
must repay the prior years tax savings to the IRS
Emile Company utilized the LIFO inventory costing method for the past ten years and saved $350,500 in taxes. If Emile switches away from LIFO, the company
nature of the error and effect of its correction on operations
Error correction requires disclosure of the:
statement of retained earnings
Events that cause changes in retained earnings are reported in the ____.
debit inventory credit accounts payable, debit cash and credit equipment
Gris Corp. purchases inventory on account and incorrectly records a debit to equipment and a credit to cash. Which entries would be used to reverse and correct this error?
the nature of the error
If a company records an error correction, it must disclose ______ in its notes to the financial statements.
the company should disclose the reason why retrospective application was impractical and the new method is applied prospectively as of the beginning of the year of change
If a lack of information makes it impracticable to report a voluntary accounting change retrospectively, then
retrospectively to the earliest year practicable
If it is impracticable to adjust each year reported for the effect of a voluntary accounting principle change, the change is applied
prospectively because the equity method is no longer appropriate
In the past, Marty Corporation held 30% of the outstanding common shares of Trace Company. During the current year, Marty sold 18% of its investment. This change should be accounted for
adjustment is made to retained earnings at the beginning of the adoption period
Modified retrospective application for a change in accounting principle requires that the new standard is applied to the adoption period and
an adjustment is made to retained earnings for the earliest period presented
Retrospective application for a change in accounting principle requires that ____.
records a current and noncurrent liability to show it must repay $75,000 over time
Schumacher Company used the LIFO inventory costing method for its first 5 years of operations, generating tax savings of $75,000. In year 6, Schumacher switches from LIFO to FIFO. The company
no change is made to previous years' financial statements
The prospective approach for reporting a change in accounting principle requires that ___.
changing depreciation method is done to reflect changes in estimated future benefits
The rationale for a change of depreciation method to be treated as a change in accounting estimate is that
change in useful life of a depreciation asset and change in estimate of periods benefited by intangible assets
What are some are changes in accounting estimates?
increase executive compensation, avoid irregular earnings patterns, report inflated earnings that are not associated with increased economic performance
What hidden motivations should investors and creditors be wary of when a company makes an accounting method change?
prospective application
What method is used to account for a change in accounting estimate?
miscounting ending inventory, failure to accrue salaries in the current year, and recording the purchase of inventory as equipment
Which of the following errors would self-correct in the following year?
change in actuarial calculations pertaining to pension plan
Which of the following is a change in accounting estimate?
it doesn't restate financial statements and it reflects the changes in the current and future years only
Which of the following occur with the prospective approach for reporting a change in accounting principle?
reason for the change, nature of the change, effect of the change on net income
Which of the following should be included in the disclosure for a change in reporting entity?
increases in earnings not based on changes on effectiveness or efficiency, effect on executive compensation, desire to hide potential debt covanent violations
Investors should be alert to accounting method changes that may be based on these hidden motivations:
debit equipment, credit repair expense
Iris Company purchased equipment for cash and incorrectly recorded the entry as a debit to repair expense and a credit to cash. The entry required to correct the error is to
modified retrospective
When a new accounting standard is applied to the adoption period and an adjustment is made to the balance of retained earnings at the beginning of the adoption period, the ____ approach is used.
justification for the new method
When an accounting change is made, what disclosures are necessary in the notes to the financial statements?
justification for the new method and per share amounts in the current or prior period affected by the change
When an accounting change is made, what disclosures should be made in the notes to the financial statements?
retrospective
When financial statements are revised to reflect the impact of a change in accounting principle, the ______ approach is used.
estimate
When it is impossible to distinguish between a change in principle and a change in estimate, the change should be treated as a change in
pattern of receiving benefits and future benefits from the asset
Which of the following are estimates used in asset depreciation?
prepare a journal entry to correct the error, restate previous years financial statements that are incorrect, and disclose the nature of the error and the impact of the error on net income
Which of the following are requirements for the correction of an accounting error?
miscounting inventory at the end of the year
Which of the following errors will self-correct?
overstate net income and assets $10,000
Glimmer Corp. miscounts and overstates its ending inventory in year 1 by $10,000. Ignoring tax effects, what are the financial statement effects of this error in year 1?
inventory, income tax payable, retained earnings, COGS
When a company changes its inventory method from LIFO to FIFO, what accounts are affected in the comparative financial statements?
statement of retained earnings
When an error causes the ending balance of retained earnings to be incorrect, a prior period adjustment is reported in the
debit equipment credit repair expense
Iris Company purchased equipment for cash and incorrectly recorded the entry as a debit to repair expense and a credit to cash. The entry required to correct the error is to ___.
financial statements of prior periods to be revised retrospectively
A change in reporting entity requires ____.
IFRS permits the effect of an error to be reported in the current period if it is not considered practicable to report it retrospectively
A difference in accounting rules for accounting changes for U.S. GAAP and IFRS is
either a single company or group of companies that reports a single set of financial statements
A reporting entity can be ___.
prospectively
GAAP requires that a change from the equity method to another method of accounting for long-term investments is accounted for:
previous financial statements are revised to reflect the use of the new method
The retrospective application requires that _____.
